Joseph Clancey | June 25, 2023
The cloud has unleashed a number of game-changing benefits for businesses, from vastly increased agility and scalability to simpler disaster recovery and improved collaboration. The constraints of on-premises computing have given way, as companies offload the management and maintenance of hardware and software to cloud service providers (CSPs) and focus their resources on strategy and business innovation. Lower costs are also often mentioned as a key cloud benefit, but, in reality, there’s no guarantee. While the types of costs related to on-premises computing and the cloud may differ, they both can still be considerable. This is where total cost of ownership (TCO) comes in. TCO models can apply to any asset as a means of looking beyond the purchase price to understand all the cost implications of owning and managing that asset.
Cloud TCO is a way to assess costs before any cloud-related decisions are made, such as choosing a CSP or identifying which applications to migrate to the cloud. Given the number of obvious — and not-so-obvious — costs involved, figuring out an accurate cloud TCO can be challenging. Let’s examine what’s involved in calculating TCO for both on-premises and cloud computing models to help businesses determine whether a move to the cloud makes financial sense.
What Is Cloud TCO?
Cost is one of the main reasons companies move from an on-premises computing model to a cloud computing model. But whether a cloud migration ultimately costs less to implement and operate over the long term depends on many variables specific to each customer. Those variables include the size of the organization, industry regulations, the complexity of the environment, how frequently the cloud infrastructure is used and the volume of stored data.
Cloud TCO tallies the costs of implementing, operating and maintaining a cloud environment over a specific time period, giving companies the ability to assess whether the move makes financial sense and, if so, budget appropriately to ensure success. TCO is a critical tool that helps companies compare vendors and options when evaluating cloud solutions. It’s also an essential element of calculating cloud return on investment (ROI), which weighs the cost of cloud solutions against a financial assessment of the expected benefits of cloud environments. ROI is a measure of the “true value” of cloud computing. The more the value exceeds the expected costs, the more beneficial the investment.
It probably makes sense to pause here and clarify that, when it comes to cloud computing, the “O” in TCO is a bit misleading because CSPs essentially lease space on their hardware and infrastructure to customers. As such, customers don’t “own” that equipment; they rent it. But the nuance doesn’t impact the ability to calculate TCO. Essentially, costs are costs, and, while the types of costs may differ, TCO for cloud vs. on-premises is still a valid comparison.
Tangible vs. Intangible Costs
Calculating cloud TCO isn’t necessarily simpler or more difficult than calculating on-premises TCO, but it is considerably different. That’s because each approach has different tangible and intangible costs. Tangible costs, often called “direct costs,” are readily apparent expenses that are relatively simple to identify and calculate; the purchase price for a software subscription fee is a good example of a tangible cost. Intangible costs, on the other hand, aren’t as easy to identify and calculate, which is why they’re often referred to as “hidden” or “indirect” costs. A better name for intangible costs might be “overlooked costs,” because they’re the most likely to be inadvertently missed in cloud TCO calculations. The impact of network downtime on employee productivity is a good example of an indirect cost. This article will review all these costs, as well as the factors impacting cloud costs, to help businesses understand how to arrive at an accurate cloud TCO measurement.
- Cloud TCO calculates the direct and indirect costs of a cloud migration to help companies make informed decisions about deploying and managing cloud computing environments.
- Cloud TCO is a key component of ROI, which weighs the value of cloud computing’s benefits against its costs to determine whether cloud investments make smart business sense.
- To understand cloud TCO, companies must also understand the costs of on-premises computing environments, which may or may not be more cost-effective.
- Cloud and on-premises computing have tangible costs, which are relatively easy to identify and calculate, and intangible costs, which aren’t so obvious and are often overlooked.
Cloud TCO Explained
Cloud TCO broadly consists of two cost categories: up-front and ongoing costs. Up-front costs include expenses related to implementing a cloud computing environment. These costs cover planning and assessment, initial fees from CSPs, migrating data from on-premises to the cloud, refitting some applications for usage in the cloud, consultants, training and security.
Ongoing operational costs include monthly or annual cloud subscription fees. Most CSPs charge fees based on how much a company uses the provider’s cloud infrastructure. Pricing can differ based on the type of cloud services used and the volume of work done in the cloud. For example, data storage rates are separate from rates for transferring data or processing information. CSPs may also charge ongoing fees for additional upgraded services, such as high-powered analytics or machine learning capabilities. Ongoing training costs to upgrade skills also fall under ongoing costs. Maintenance fees are often the responsibility of the CSP, although companies may also need to upgrade some on-premises devices, such as end-user devices, to optimize the cloud experience.
How to Calculate Cloud TCO
The formula for calculating cloud TCO isn’t particularly complex:
TCO = tangible and intangible costs of implementing a cloud environment + the cost of maintaining and upgrading it over a specific period of time
Most cloud TCO calculations assume a time frame of five years before the cloud environment needs significant upgrades or replacement. The complexity of cloud TCO, however, stems from the challenge of identifying its many tangible and intangible costs. Cloud costs can vary greatly, depending on the specifics of the implementation (the number of applications running in the cloud, for example, or the amount of data storage and networking required). The following list outlines the various steps for calculating cloud TCO.
- Calculate existing infrastructure costs.
The first step toward assessing cloud TCO is to establish a comparison point with the existing, on-premises infrastructure to determine whether the cloud makes sense. On-premises hardware and infrastructure costs are typically tangible, or direct, costs, meaning that they’re relatively simple to identify and calculate, although there are several components to consider. Like everything intrinsic to building and maintaining a computing environment, these costs can vary from company to company.
- Equipment and supplies: For an on-premises computing environment, hardware costs include the servers necessary to host software — application software, application servers and databases, for example — as well as storage devices and networking equipment. Hardware and software also require cooling to run efficiently, so electricity costs will factor into TCO, as well. The more equipment, the more power is required.
- Maintenance and upgrade costs: All computing environments require maintenance and upgrades, although the cost is often much greater for on-premises environments. Because they own and control the infrastructure themselves, companies are responsible for maintenance costs and upgrades. This includes the considerable cost of replacing hardware and software, as well as the intangible cost of the resources required to do the work.
- Data center materials and environment: In an on-premises environment, the data center houses all necessary IT infrastructure, including servers, storage devices and networking equipment. Costs for data centers include server racks to hold the servers, cooling systems to allow equipment to operate at peak performance, power distribution units, redundant power equipment in case of failure, plus fire suppression systems, such as fire extinguishers, smoke detectors and water systems.
- Licenses and subscriptions: Software costs for on-premises environments include operating systems, databases, application servers, backup and recovery systems, security and performance monitoring. These costs also include licenses for business applications themselves, such as enterprise resource planning (ERP) software. Subscription fees may include the cost of virtualization software, which helps companies take full advantage of their hardware by allowing them to run multiple applications and operating systems on a single server, rather than requiring a separate server for each.
- Security costs: On-premises data centers require several layers of security, most of which is handled via software. Network security threats need to be managed with firewalls and tools for intrusion detection, prevention and vulnerability. Data security is also of paramount concern, with a host of U.S. and international regulations requiring compliance, such as the Health Insurance Portability and Accountability Act (HIPAA), Europe’s General Data Privacy Regulation (GDPR), and HITRUST. Data security solutions include software for encryption, access control and backup and recovery. A unique cost of on-premises environments is the cost of physical security to prevent unauthorized access to the data center, such as security guards and cameras.
- Calculate the existing system’s intangible costs.
On-premises computing also includes a host of intangible (or hidden) costs that companies shouldn’t overlook in their cloud TCO calculations, including:
- Downtime: When on-premises environments suffer outages, productivity and output can come to a screeching halt. Downtime is often one of the most significant intangible costs of on-premises computing. To calculate the cost of downtime(opens in a new tab), review log files to get a sense of average server interruption, then multiply that number by a calculation of the average hourly wage for the workforce. Understanding how downtime impacts revenue is a bit more complex. Build a calculation for revenue by hour, then multiply that figure by average downtime in hours. For example, calculate average downtime in hours per week then multiply that number by average revenue in hours per week. In addition to productivity losses, the cost of maintenance to fix the downtime issue should also be included in on-premises TCO.
- Slow speeds: Just as important as downtime are slow speeds, another common issue with on-premises computing. TCO calculations should identify the number of employees impacted over a specific period of time, then multiply the result by several cost factors, such as the average hourly wage of the impacted users and an estimate of the percentage of productivity lost due to slow speeds. For example, if an employee was working at 90% productivity but productivity dropped to 50% because of slow speeds, productivity loss is the percentage difference between the two: [(50 – 90) ÷ 90] x 100 = -44.4%. From there, use the following steps.
- Multiply the number of impacted users by their average wage per hour to get a total cost of their time per hour.
- Multiply that number by the percentage of productivity decline to gauge the total cost of lost productivity per hour.
- Multiply the total cost of lost productivity per hour by how many hours the speed issue persisted to determine the total cost of lost productivity for the speed issue.
- Calculate the cost of maintenance and support for the speed issue.
- If customers had difficulty reaching service reps during this period, estimate the percentage of customers affected.
- Multiply the percentage of customers affected by the average total company revenue per hour to calculate the cost of lost customer connections during the speed issue.
- Add the costs for lost productivity, maintenance, support and lost customer connections to build an accurate estimate of the total cost of slow speeds.
- Opportunity costs: When weighing a decision, every option has its pros and cons. But choosing one option means potentially missing out on some of the benefits of other options. Calculating these opportunity costs can be challenging, because they’re often theoretical, but it’s important to include the value of lost opportunities. While choosing an on-premises solution might ultimately make the most business sense, it also means missing out on some critical cloud benefits, including:
- Value of alleviating compliance risks: Compliance with U.S. and international regulations is an important concern, given the increasing penalties for noncompliance. Cloud computing solutions often include tools that help with compliance, including encryption and access controls, data backup and recovery, automated workflows to reduce errors, and compliance tools and certifications offered by CSPs. On-premises security can be expensive because it involves costs for security software, equipment to monitor data centers and physical security guards. To calculate TCO, companies should look at their spending for on-premises security. They should also identify regulations that pertain to their business and look at historical information to determine the likelihood of breaches and any potential financial impact. Finally, companies should ask CSPs about compliance issues and patterns to determine the likelihood of cloud breaches, versus those that occur on-premises.
- Value of eliminating capital expenditures: Capital expenditures, or CapEx, refer to the investments companies make to generate more long-term value in their businesses. Spending on CapEx includes purchasing anything, from printers to buildings, and often involves large up-front investments in assets used over a long period of time. Operating expenditures, known as OpEx, refer to smaller expenses related to day-to-day operations. The servers, software licenses and networking equipment required to build an on-premises data center fall under CapEx. Because cloud computing doesn’t require spending on hardware and infrastructure, these up-front costs are removed and replaced by much lower monthly payments based on usage. This frees up money that might then be applied in ways that help businesses pursue strategic initiatives or resources.
- Value of increased agility: Cloud computing environments automate many on-premises IT processes that often consume considerable time and resources. Provisioning and deploying servers on-premises, for example, can take days or weeks, depending on the complexity — cloud provisioning can take minutes or hours. Cloud computing also offers the ability to quickly, or automatically, scale capacity up or down to meet demand, and companies pay only for the capacity they use. On-premises scaling, on the other hand, can involve time and money to purchase and configure new equipment. The increased agility of cloud computing, while difficult to measure, gives businesses the ability to innovate and respond quickly to market changes in ways on-premises computing can’t.
- Wasted employee time: In an on-premises environment, IT staff often lose productivity because they have to troubleshoot and fix issues, which can take minutes or weeks, depending on the severity of the problem. Even diagnosing the difficulty can have IT teams running in circles searching for answers. Patching software to maintain security is another time suck. These types of time-consuming tasks, although often challenging to calculate, prevent IT teams from contributing to more strategic initiatives. In cloud computing, many of these tasks are the responsibility of the CSP or software-as-a-service (SaaS) application provider.
- Calculate migration costs.
In a cloud migration, one of the most important steps is transferring applications and data from the existing environment to the cloud. There are several options when it comes to migration. Lifting and shifting moves applications to the cloud with no changes. This can sometimes limit application functionality, however, because on-premises apps aren’t necessarily built for the cloud. Refactoring applications refers to making changes to the code so the apps can take advantage of cloud computing functions, such as load balancing and auto-scaling. Refactoring optimizes applications but doesn’t change their functionality. Revising applications changes their code to add new features or update existing ones, with the goal of extending their functionality to address new business needs. Finally, rebuilding apps is a ground-up reimagining of their architecture to optimize them for cloud features, such as serverless computing and containers. Rebuilding changes both the functionality of an application and the user experience. The following considerations will help develop an accurate assessment of the migration costs of moving to the cloud.
- Business and technical needs: No cloud migration can begin without a full understanding of what the migration should deliver from both a business strategy and technology standpoint. Companies must answer this question: “What is the value we expect from moving to the cloud?” Answers might include reduced costs, improved scalability, increased security and faster innovation. Identifying and quantifying the benefits of cloud computing is a key component of calculating ROI, which subtracts TCO from the financial measure of all its benefits. The higher the value of cloud’s benefits versus its costs, the higher the ROI and the smarter the investment. Companies should also evaluate their existing application portfolio to determine which apps should be migrated, and how, as well as the different cloud environment options, including:
- Public cloud: Servers, storage and networking resources are hosted off-site by a CSP and accessed by customers using the internet. Multiple customers share the cloud resources.
- Private cloud: The cloud computing environment is hosted by a third party either off-site or on-premises but computing resources aren’t shared. This is ideal for companies dealing with regulatory-compliance concerns.
- Hybrid cloud: This scenario leverages the benefits of public cloud for certain applications and functions but uses a private cloud to host sensitive data.
- Consultant fees: Depending on the size and complexity of the migration, using consultants can be crucial. Fees vary according to the specifics of the project, such as the type of consulting needed and the duration of the work. In a cloud migration, consultants can help with any of the following tasks:
- Business needs analysis
- Project management and planning
- CSP vendor evaluation
- Data migration
- Application migration
- Cloud security
- Training and support
- Network bandwidth: For a migration to be successful, companies need to specify how much bandwidth they’ll need for their cloud applications. Insufficient bandwidth can result in performance issues for cloud apps, including latency, poor user experience and loss of productivity, which ultimately defeats the purpose of moving applications to the cloud in the first place. Assessing network bandwidth is also an important cost to consider for data migration. Larger data sets require more time to migrate, which requires more bandwidth. CSPs may charge networking fees for moving data into their systems.
- Employee time: While consultants are often hired to help with cloud migration, employees will almost always be involved, as well. Cloud TCO should include the salaries of employees who work on the project, as well as:
- Training and certification costs: Depending on the extent of the migration, employees may need to become certified in new skills, such as infrastructure as a service. This may require costs for certification classes.
- Overtime costs: Some employees may require overtime pay for additional work on the migration.
- Recruitment and onboarding costs: Additional resources may be necessary during and after the migration, which will add costs for new hires, for example.
- Opportunity costs: During a cloud migration, employees are often moved from their “day jobs” to help with the project, which hinders their ability to handle their core responsibilities. Companies can measure opportunity costs by estimating how much an employee’s productivity will decline while working on the project, then multiplying that by the employee’s salary during that period.
- Calculate monthly charges.
Cloud computing vendors often charge monthly fees for using their platforms. Those fees are often based on two factors: the type of cloud service performed and cloud consumption. The type of cloud service performed falls into three categories:
- Network services connect servers and manage high volumes of traffic. Prices depend on the specific type of network service used (for example, load balancers or content delivery networks), the volume of data transferred and the distances transferred.
- Storage services are used to host sensitive information. Pricing depends on the type of storage service (for example, file storage or block storage), the amount of storage required and the frequency of access.
- Compute services provide the processing power to run applications and perform tasks, known as workloads. Pricing depends on the type of compute service (for example, virtual machines or serverless computing), the amount of CPU and memory required and the level of usage.
Cloud consumption is essentially how much a customer uses the various cloud services defined above, each of which may incur charges at different rates. This on-demand pricing model means that monthly fees can vary widely from company to company, as well as from month to month for an individual customer. To build an accurate cloud TCO for future usage, customers need to first understand their current on-premises consumption patterns or risk getting unexpected bills. To achieve this, companies should analyze two key aspects of their usage: workloads and resources.
- Analyze workloads. Workloads are essentially tasks that run in the cloud using any combination of network, storage and compute resources. Examples include applications and virtual servers. Some workloads, such as simple batch-processing to generate a report, are relatively light and don’t require many computing resources. Others, however, such as ERP applications with many users and large data sets, require heavier, more complex data processing. To understand compute, network and storage requirements (and their cost) in a cloud environment:
- Identify applications. Build an inventory of the applications used regularly.
- Identify dependencies. Which operating systems and databases do each of those applications use?
- Understand technical requirements. Measure the amount of compute, storage and networking resources current applications use in the legacy environment.
- Prioritize workloads. Not all cloud workloads can migrate at the same time, so it’s important to categorize them according to their priority and complexity of migration. Not all applications belong in the cloud. For example, for compliance reasons involving data regulations, some data must be stored on-premises.
- Assess needed resources. Post-migration, it’s critical to have the necessary cloud resources to support applications and infrastructure for both the short and long term. Accurate resource assessment ensures better budgeting. The following steps can help.
- Document use: For applications identified for migration, document how much processing/CPU capacity each currently uses, as well as memory, storage and network bandwidth.
- Know how workloads are used and identify usage patterns: Knowing average workload usage times, peak usage periods and how those numbers have grown over time will help predict future usage patterns. Planning for peak usage, as well as lower usage periods, can be difficult for many companies and can result in cloud over- or under-capacity. Many CSPs offer auto-scaling capabilities to manage capacity and reduce risk.
- Understand instance types: Instances are combinations of CPU, memory, storage and bandwidth applied to various workloads, based on their architecture. Some instance types are balanced, while others are optimized for workloads requiring more memory, storage or compute capacity. Still other instances include higher-processing options for heavier workloads, such as artificial intelligence (AI) or intensive data analysis. Pricing varies for different instances.
- Assess network connectivity requirements for each workload: With on-demand cloud pricing models, networking fees hinge on how much data is transferred among resources and where it’s being transferred. Optimizing network topology, using load balancers or virtual private clouds, can help lower network connectivity costs.
- Be clear on disaster-recovery resources: These resources, including backups in the event of data loss, should factor into cloud TCO costs.
- Compare cloud TCO vs. on-premises TCO.
With all costs calculated for both on-premises and cloud environments, comparisons can be drawn between the two. Keep in mind that cloud computing isn’t necessarily cheaper than on-premises computing — although it certainly can be, depending on the circumstances. From a cost and accounting standpoint, however, costs accrue differently. In other words, cloud computing requires much less up-front cost because it doesn’t involve large hardware and infrastructure expenses to get started. But cloud’s steady monthly payments can come with larger costs over time, depending on usage. With a comprehensive cloud TCO, understanding the differences in costs will be much easier.
Factors That Affect Cloud TCO
Cloud TCO depends on many set costs, including the pricing options of each CSP. But it also depends on a host of variables — such as the complexity of the cloud computing environment — specific to the company involved. Some of the factors that affect cloud TCO include:
Cloud TCO depends on a host of variables related to the complexity of an individual company’s cloud computing environment.
Type of Business
In general, the cloud can make more financial sense for some types of organizations than others. Smaller businesses, for example, with fewer resources and less complex needs, fall at one end of the cloud TCO spectrum because they have much lower
costs than larger enterprises, which have more users, more complex storage, greater compute and networking requirements and a need for customization. Larger companies, specifically international organizations, may also have higher cloud TCO because of varying costs or limited options in different countries. TCO may also vary based on the type of industry. Heavily regulated industries, such as finance and health care, may require more security and compliance tools, increasing TCO.
Cost of Training
A migration from on-premises computing to cloud will almost always involve training for existing employees during the migration, as well as after, as new features and capabilities get rolled out. But the degree of training required depends on several factors, including:
- Migration complexity: More complex migrations demand more advanced technical skills for IT staff, therefore requiring training and certification.
- Number of employees: Those with larger IT staffs will have larger training bills.
- Ongoing training: As companies take advantage of new cloud features, more training will be required.
Which applications are migrated to the cloud, and how they get there, can have a big impact on cloud TCO. As previously discussed, companies can choose to lift and shift, refactor, revise or rebuild applications. Each of these options involves work that could add significant cost to cloud TCO. In addition to these development costs, newly migrated apps may require costly integration with other core applications. Migrating applications to the cloud can also add new licensing fees, as some application vendors will revise licensing agreements when their apps are migrated to the cloud. It might be more cost-effective to purchase new application licenses to replace existing software. SaaS applications are built for the cloud and may incur less cost over time.
Some industries, such as health care and finance, are subject to significant regulations that can influence cloud decision-making and costs. For example, some data regulations, like those included in Europe’s GDPR, may mandate that data from some countries be physically hosted in those countries, resulting in multiple cloud environments and extra cost. Data regulations are also likely to require stricter data security processes, which can also increase costs.
One might wonder how a physical environment could contribute to cloud computing costs, given that cloud computing places hardware and infrastructure responsibilities with a CSP. But even though companies no longer have to host physical environments when they move to the cloud, some elements of a CSP’s physical environment can potentially have an impact on customer costs. For example, the physical location of the provider’s data centers can affect data transfer and latency for end users if customers are located far from those data centers, resulting in increased data transfer costs.
Cloud Risk Management
Cloud security measures go a long way toward lowering risk and improving TCO. CSPs include security as part of their offerings, but some customers may want to add more. And while those investments require additional costs up front, their benefits can mitigate the effects of potentially devastating security breaches, in terms of financial penalties, damaged reputation and lost business. Multifactor authentication, encryption and access controls all can help prevent costly security breaches, data loss and downtime. Investments in regular cloud audits can also avert costly incidents.
Processes Supported by the Cloud
Cloud computing includes a number of built-in processes that ultimately affect TCO. Automation services in most cloud environments minimize the cost of IT staff and streamline many processes, resulting in lower TCO. Customers can also take advantage of scalability options from CSPs (which, it should be noted, can sometimes involve additional cost). Auto-scaling, for example, can help ensure that customers use only what they need each month. CSPs also incorporate resource management tools to optimize usage of compute, networking and storage resources in the cloud, which can lower TCO, but these tools sometimes add cost, depending on the provider. Third-party vendors also offer these tools for companies that require increased capability.
Cloud technology can have a dramatic, sometimes transformational, effect on company culture. The extent to which companies realize this can have significant implications for cloud TCO. For example, migrating to a cloud environment can improve collaboration and productivity among teams, because they have access to more shared data in real-time. Cloud computing also increases flexibility and agility for many companies. Scaling computing resources can happen much more quickly in cloud environments, with fewer required resources. This allows companies to shift resources to more strategic initiatives that ultimately provide greater ROI. Additionally, CSPs automatically update their technologies, giving companies instant access to the latest tools, such as AI.
Attributes of a TCO Model
A cloud TCO model incorporates multiple categories of costs. Direct (or tangible) costs are relatively easy to identify and calculate. Indirect (or intangible) costs are less obvious and more complicated to calculate and are, thus, often overlooked as part of TCO. Still, both are necessary for an accurate cloud TCO calculation. The costs can vary, depending on the CSP and complexity of the cloud deployment. Cloud TCO is defined by the following attributes:
These direct costs are related to setting up a cloud environment. In general, acquisition costs include setup fees from a CSP (if applicable), as well as costs for consultants to help with the migration, from project management and change management to training. They can also include networking or end-user devices to take advantage of cloud capabilities. Acquisition costs can involve integration costs, such as providing a cloud integration platform to connect disparate applications, as well as data migration costs for transferring data from on-premises to cloud. CSPs may charge larger network fees for large data transfers.
Operating costs, also known as ongoing costs, comprise several components. CSP fees for usage of compute, networking and storage resources are a key element of ongoing cloud computing costs; pricing can vary by CSP. Maintenance and support fees for updates, patches and other technical support are also part of operating costs. Companies can use in-house resources for maintenance and support, as well as fee-based services from CSPs and consultants. Companies should not forget to include backup and recovery services as part of ongoing operating costs, as well.
People costs of cloud computing play a significant part in overall cloud TCO and include a combination of in-house resources and hired consultants. Larger enterprises tend to have the resources to build in-house IT teams comprised of cloud engineers, architects and developers who design, build, roll out and oversee cloud operations. When calculating TCO, consider current and future people costs. Cloud computing often results in the need for more resources and skill sets as environments become more complex, particularly in areas like cloud security. Smaller organizations often use consultants for some of the responsibilities listed above. Companies of all sizes are likely to use consultants in some capacity, such as vendor assessments, project management, change management, data migration, security and training.
Disposal costs refer to the expense of removing legacy, on-premises technologies as they’re replaced by a new cloud environment. Some physical equipment can’t simply be thrown in the garbage and requires proper disposal or recycling, which likely means more cost. Security protocols also mandate that data on retired hardware be destroyed, which may mean engaging outside help. Cloud TCO should account for the people and transportation costs of proper equipment disposal.
Sunk costs refer to purchases already made for equipment and services that are no longer needed in a cloud migration and that can’t be recouped immediately. It’s possible to resell some equipment and software to recover the expense, but, in many cases, IT assets are retired earlier than expected and these costs should be factored into cloud TCO. To calculate sunk costs, review invoices and purchase prices for legacy assets retired as a result of the migration. TCO should also include any maintenance and support costs for the asset prior to retirement. Each asset’s current value should then be determined according to accounting rules of depreciation and amortization. The difference between the total costs paid for the asset and its current value is the sunk cost for that asset.
How to Lower Your Cloud TCO
Generally speaking, cloud computing isn’t inherently cheaper than on-premises computing. Cloud computing usually includes on-demand pricing models, which can escalate quickly, if companies aren’t careful. Keeping cloud expenses in check is of paramount importance. One benefit of calculating cloud TCO is that it accounts for all initial and ongoing costs. With that in hand, companies have a blueprint for how to pull various levers to lower overall cloud TCO. Here are several ways to do it.
- Negotiate contracts. Lowering cloud TCO starts with one of the first steps in a cloud migration: negotiating with a CSP. Some providers may be willing to trim costs in return for some degree of guaranteed volume or revenue.
- Right-size workloads. Right-sizing refers to how companies manage servers (or instances) in the cloud. Unlike on-premises computing, where setting up servers takes time and resources, launching a cloud instance, which includes operating systems, networking, compute and storage resources, can be done on demand very quickly. Unfortunately, with the ability to spin up resources anytime, companies often launch instances that don’t get used, which wastes money. Cloud monitoring tools, although an investment, ultimately reduce those costs by identifying unused resources that can be adjusted.
- Reserve capacity. Companies can reserve instances in advance for predictable workloads that run continuously, such as databases, web servers and application servers. Pricing for reserved instances is less than that for on-demand instances and can lower overall TCO.
- Optimize storage. Data storage management helps trim costs by identifying little-used data and placing it on lower-priced storage options from CSPs. Lower-tier storage options often have minimum storage requirements and fees for retrieval.
- Automate processes. Automating some cloud operations can help cut costs, as well as errors. Some commonly automated processes include auto-provisioning of instances, as well as scaling capacity up or down, depending on demand. Automated monitoring can mitigate risk by detecting performance or security issues in real-time, and automated backup and recovery of data can save time and money by keeping companies prepared for unexpected interruptions.
- Evaluate cloud environments. Multicloud or hybrid cloud options can bring costs down by giving companies opportunities to find lower-cost options for some aspects of cloud computing, such as data storage. Blending cloud environments allows companies to keep some high-volume workloads in private clouds or on-premises, for example, which may prove to be more cost-effective. Choosing a multicloud environment, meanwhile, lets companies select the most cost-effective services from each CSP.
Make Your Move to the Cloud Easy With NetSuite
ERP systems are one of the most common cloud applications, because they’re ideally suited to take advantage of many key cloud features, including scalability, mobility, customization, security and lower TCO. NetSuite ERP makes ERP migration simpler and less costly by offering data migration tools, easy scalability and flexibility, multiple deployment options, customizable workflows and comprehensive support and maintenance. Here’s how.
- Data migration is one of the most complicated and costly elements of moving applications to the cloud. NetSuite ERP’s automated migration tools make data mapping, cleansing and validation seamless, more accurate and less time-consuming and costly.
- NetSuite ERP’s cloud infrastructure scales easily to meet growth needs, with tools to manage compute, storage and networking resources quickly and easily to optimize costs.
- Customizable workflows allow companies to easily adapt NetSuite ERP to their unique processes and policies, improving overall productivity. NetSuite also adapts to regulations, such as data privacy and financial rules, which minimizes the risk of noncompliance.
- Customers can deploy NetSuite ERP in public, private or hybrid cloud environments to take advantage of the unique features and cost effectiveness of each.
- Finally, NetSuite ERP’s comprehensive support can eliminate costly roadblocks during migration, while training services help ensure a smooth transition and wider adoption.
Cloud computing costs go well beyond subscription fees and involve all the direct and indirect costs of selecting, deploying and maintaining a cloud computing environment. Accurate cloud TCO calculations are integral to any assessment of the value of cloud computing versus on-premises solutions. Calculating cloud TCO takes diligence and patience, but it ultimately provides a wide range of benefits before, during and after a cloud migration.